The Establishment of the National Corporation for Tourism and Hotels - Research Paper Example

? Advanced Financial Analysis Table of Contents Executive Summary 2 Introduction 3 Industry Environment and Industry Risks 4 Client Strategies 4 Marketing Activities 4 SWOT Analysis 5 Business Risks 5 Management/Ownership 5 Overview and Brief Analysis of the Company’s Financial Position and Resources 6 Review and Analysis of the Financial Statements of the Company for the Past Two Years 6 Profitability 6 Liquidity 8 Solvency 9 Conclusion 10 References 11 Executive Summary The establishment of the National Corporation for Tourism and Hotels (NCT&H) was in the year 1996 mainly was into the business of catering to the needs of both the tourists and commerce in Abu Dhabi. The main motto of NCT&H is to provide its unparallel contribution mainly in the travel industry both in Abu Dhabi, as well as in international destination. The areas of specialisation of NCT&H are in the fields of hotel acquisition and management, hospitality services, transportation and catering. NCT&H has taken up some of the important projects on the hospitality industry, which are Hotel Le Bristol, Grand Millennium, Saadiyat Island and Nareel Island. The project of Hotel Le Bristol is the most stylish of its kind, based in Paris it was voted for as the best hotel of the year 2011. The Grand Millennium property of NCT&H was famous for its food and beverage outlet having grand ballroom which has the capacity of 1000 guests and is expected to open in the second quarter of 2012. Saadiyat Island is a joint venture of NCT&H and the UAE’s capital’s TDIC (Tourism Development and Investment). The plan is to set up a low rise hotel with 250 rooms on the shores of Saadiyat Beach district. Lastly, the project of Nareel Island is also a joint venture but with ALDAR Properties of PJSC developing premium gate and the residential property with features like health and fitness club, spa and restaurants. It will even provide Private Marina for the VIP’s along with hotel excursions. There has been an increase of Dhs. 6 million in spite of the fall in the revenue by Dhs. 28 million. The decrease in rates of the hotels is the cause behind the dipping of the revenue of NCT&H’s opening of the chain of hotels with lower room rates for the new properties those are being opened (National Corporation for Tourism and Hotels, 2012). Introduction From the very inception of the economic environment it is going through massive changes. In comparison to the previous times economic environment has become more lenient and open towards the private participation of the economic activities related to trade and capital flow (Pailwar, n.d., p. xi). The study of the company’s annual report gives us the idea that NCT&H is mainly affected by the economic factor which are under constant fluctuation for the interest rate risk of the company which the company is avoiding by the entering into swap trading through the banks. But the company has faced the economic downturn like all other industries during the year of 2008-09. This was the time when the economy went into the sudden depression creating unrest for all the industries of the economy. The economic depression is the main reason behind the low spending capacity of the common mass which again was lower than the NCT&H business for a long period of time (Pailwar, 2009, pp. 1-10). Industry Environment and Industry Risks There are a few factors that are responsible for affecting the environment of the hospitality and tourism industry and are also the reason of its probable risks. The factors being the weather, political conditions, economic conditions and globalisation may be the reason for making or breaking the business of a hospitality and tourism industry. As far as weather is concerned is the hotel is situated in place where snow storming is prevalent the charges may get doubled as skiing can be enjoyed along with the stay. But when it comes to hotels in tropical countries as is NCT&H if the weather turns out to be windy the hotel might lose business as well. Even the natural disasters can affect the hotel business a lot. The political problems turns out to be a distress for the hospitality industry as was the case of 9/11 after which tourists were scared to fly to United States and flights would be cancelled at random. Thus any political unrest can deter the tourist from travelling to the concerned place. Another risk faced by the hospitality and tourism industry is from the economic conditions of the concerned place. The loss of jobs or tendency to save too much due to the unpredictable future curtails the spending of the guests again causing a loss to the hospitality industry. The main risk of the hotel industry is majorly related to globalization because as the countries are economically depended on one another hence a crisis in the economy of one country will affect all the other to some extent resulting in the debacle of the industries of the country (Montana State University, n.d.). Client Strategies Client strategies are the strategies that are adopted to attract the customers for buying the services or the products of the company. Through client strategies the growth in the business can be achieved increasing the net earnings of the company. Marketing Activities The marketing activity adopted by NCT&H for the further growth of its business is through online marketing with the help of the company site. The best features of each hotel in terms of its location, ball room; etc is marketed in such a way that the entire guest will easily be attracted to avail the offer. In places where new properties of NCT&H have been launched, the rooms are being offered at low prices which are again an attractive package for the guests towards the marketing activities. SWOT Analysis The main strength of NCT&H is it tries to build its hotel properties in exquisite place in the world and even in Abu Dhabi giving its guests a complete feel of leisure and peace of holiday. But the problem with these hotels being situated far from the main city the cost of the food and beverage is generally high in comparison to other hotels, thus cannot be afforded by many. The NCT&H avails all the opportunity present to expand its business in the sense it even provides halls for the occasion of marriage. However, there are some factors which may be a threat to the company and pose trouble in the long run like the economic factors such as fall of the share market, inflation rate and change in government policies, etc. Business Risks The three main business risks faced by NCT&H are interest rate risk, credit risk and liquidity risk. The change in the market interest may affect the interest rate calculated on the fair value of the stock posing a threat to the company. Due to the increase in forgery in the market the credit risk has grown to a great extent. Even after the verification of the creditworthiness of the third party financial losses takes place as a result of credit risk. Liquidity risk generally arises when a new property is being opened in some place. The requirement of liquidity of both its assets as well as investments is the highest. Then the urgency of both the financial tools maturity becomes necessary thus putting the business of NCT&H at risk. Management/Ownership The management of NCT&H lies with the board of directors of the firm; the chairman of which is Hamdan Bin Mubarak AL Nahyan. The management of the organisation has adopted various revenue models as a result of which the revenue of the company has shown positive return in spite of the increase in the rate of depreciation and the interest amount on the loan. Even the revenue from a few hotels was low as they were newly opened the rates of the rooms were initially low. Thus, from the above study we can understand the effectiveness of the management can well be assessed. Overview and Brief Analysis of the Company’s Financial Position and Resources The Total revenue seems to have risen from Dhs. 534 million to Dhs. 540 million from 2010 to 2011 but again we can observe a drop in the revenue of hotels due to a number of new hotels being opened up as a result of which to adopt a particular marketing strategy the prices of the rooms of the above mentioned hotels had to be provided at discounted prices. But the discounted prices thus provided were not a matter of concern for the enterprise because massive cost cuts were made to increase the profit margin as before. But the drop in the return was mainly due to the profit computed after the depreciation and the interest to be paid on loan, etc. Thus, the equity sales dropped by Dhs. 17 million according to the above adjustments made. The maintenance of the cash liquidity of the company was comparability good enough than the previous year. A lot of new capital investments accompanied by the Central Purchasing Division were made in tandem with the Corporation. Thus from the above study we can conclude that the focus of the company has been mainly towards the growth of cash liquidity, cost control measures have been well adopted and the debt collection has been thus corrected. Review and Analysis of the Financial Statements of the Company for the Past Two Years Profitability The main motive of any company no matter in which sector it is involved in is how to make profit for the firm it is dealing with. So, one of the main indicators to evaluate the company’s financial performance is its profitability ratios (Figure 1). Figure 1: Profitability Ratios The gross profit ratio is the amount of profit that the company makes in respect of the revenue generated. The computation of the gross profit margin shows a slight drop in the gross profit over the year due to the opening of new properties and thus providing the facilities of the same at lower rates. Figure 2: Profitability Ratios The net profit of the company has dipped a little which implies that the indirect cost of operation has been more over the year due to the fact of opening of new hotels of the company where a lot of cost has gone for the expenses incurred by it (Figure 2). Figure 3: Profitability Ratios The total asset turnover ratio has been positive due to the increase in the revenue with respect to the total assets of the company. Thus the profitability of the company seems to be a favourable one (Fabozzi & Drake, 2009, pp. 58) (Figure 3). Liquidity Through the liquidity of a company we can assess the short term payment capacity of the firm. The liquidity of the company has been calculated through the calculation of current ratio, quick ratio and cash ratio. Figure 4: Liquidity Ratios Current ratio is the bar showing the short term payment capacity of the firm. Decrease in the current assets and increase in the current liability over the year is the reason behind the fall in the current ration from 2010 to 2011 (Figure 4). Figure 5: Liquidity Ratios Calculation of the quick ratio is made on the basis of all current assets except that of the inventory as it is not considered as liquid as other forms of current assets. Thus a sudden decrease in the current quick ratio is due to the increase in the inventory and decrease in other current assets over the period (Figure 5) (Brigham & Ehrhardt, 2010, p.89). Figure 6: Liquidity Ratios Cash as we know is the most liquid form of asset. NCT&H executed the plan of building new hotels in the exotic places of UAE as well as throughout the world. Thus the requirement of cash in such a case must have been the most and hence the reduction in cash or cash equivalents over the year (Figure 6) (Palepu & Healy, 2008, p.19). Solvency The solvency ratio of a company is entitled to keep a check on the long term payment capacity of the firm. Figure 7: Solvency Ratios The debt equity ratio of a firm has lowered, which is a good sign for the company as it has been able to clear out its debts in respect to the equities of the company. This has occurred due to the increase in equity and the decrease in debts of the company (Figure 7) (Siddiqui, 2006, p. 642). Figure 8: Solvency Ratios Though the Equity of the company has increased yet it has not been considerably high in comparison to the total assets of the company and thus there has been a debacle in this field of ratio calculation. Conclusion At the moment the hospitality industry is in full bloom and the opportunities is huge for future because the requirement for the hospitality industry in all parts of the world are high as people are always willing to go on a vacation. However, during a particular span of time people move out more in comparison to the other time of the year. This business is not only deals with the hotel industry but also with resorts, catering and even provides banquets for marriage occasions as well. The company is sure to make profits in the future which can be easily analysed though the study of its financial reports thus obtained from the auditor’s report of the company. References National Corporation for Tourism and Hotels (2012). Financial statements. Retrieved from http://www.ncth.com/Financial-Statements Pailwar, V. K. (2009). Economic environment of business. New Delhi: PHI Learning Pvt. Ltd. Montana State University (n. d.). Factors affecting the H&T industry. Retrieved from http://www.montana.edu/hhunts/MAFCS%20WEBSITE%20DEVELOPED%202008/MAFCS%202007%20Student%20Lesson%20Plans/Unit%20Plan-%20adobe%20files/Lesson_4_Factors_Affecting_H_&_T_Lesson_Plan.pdf Fabozzi, F. J. & Drake P. P. (2009). Finance: Capital markets, financial management, and investment management. Canada: John Wiley & Sons. Brigham, E. F. & Ehrhardt M. C. (2010). Financial management theory and practice. United States: Cengage Learning. Palepu, K. G. & Healy P. M. (2008). Business analysis & valuation: Using financial statements. United States: Cengage Learning. Siddiqui, S. A. (2006). Managerial economics and financial analysis. New Delhi: New Age International. Read More